It’s no secret that most Canadians today don’t really understand the life insurance policies they own or the topic at hand. Life insurance is such a vital financial tool and an important part of your financial planning that it is up to you to have a basic level of understanding.

Here are 3 quick traps that are important to be aware of.

Incomplete details in the application

All life insurance contracts have a two-year challenge clause, which means that the insurer can challenge a claim submitted within two years of the application date if important information was not disclosed during the application process. If you have forgotten to write down a material fact in your application that is relevant to the claim, your claim may be denied. Fraudulent acts, such as lying on the application, would not only cause a claim to be denied, but could also possibly terminate your policy entirely. It goes without saying that you should always be honest when completing a life insurance contract or any insurance contract for that matter. A copy of the original application is often part of the policy and generally supersedes the policy itself. Having said that, each insured has a 10-day right to review their policy once they receive it. In that period of time, if you think the policy is not up to par, you can return it to the company and all premiums paid will be refunded.

Buy the right term coverage for your situation

This process should start with a question first: “What do I need the insurance for?” If your need is to cover a debt or a liability, then perhaps the term is better; however, if your need is longer-term, such as for final expenses, then permanent or full life would be a better option. Once you have established your need, you will have to decide what type of coverage you want; term or permanent.

Term contracts are the easiest to understand and the cheapest because the policy has an “end”; generally 5, 10, 15, 20 sometimes even up to 35 years. If the policy is renewable, a premium increase will be required at the end of the term and this is usually a big impact on the client’s bottom line. As an example: a 35-year-old non-smoker with a 20-year term and a 300k benefit can pay between $ 300 and $ 400 per year in premiums. When this policy is renewed at age 55, your new annual premium could go up to $ 3,000 per year! Most people do not understand this and at the end of the period they are devastated and usually unable to continue politics. It is recommended that your temporary program have a convertibility clause so that you have the option of converting your temporary life to a permanent policy. You can exercise this right at any time within the term of the policy without evidence of insurability. Taking a term policy without a convertibility clause should only be done when you make your purchase for something of a specific duration. Also, the short side of term life is that it does not accumulate any value within the policy, while permanent / full life does.

Permanent / Whole Life Insurance is a very complex form of life insurance because it has both insurance and investment aspects. These policies are more beneficial because you have equity in the policy and are covered until death; however, they are much more expensive than term insurance. One option that you can consider is a permanent policy with a specific term to pay it off. Using our example above, you could have a permanent policy that has a term of 20 payments, which means that you will make premium payments for the next 20 years and after that, you will have your policy until death without having to make any other payments. . It is very important to understand the variables along with your needs before making your purchase.

Buying creditor life insurance vs. Personal life insurance

One of the biggest misconceptions people have is that your creditors’ life insurance is true personal life insurance coverage and will protect your family in the event of death. Too often consumers buy these products, usually found with their mortgage and credit cards, simply by putting a check mark in a box during the application process to accept the plan. It seems the most responsible, but many families are left in paralyzing situations when it comes time to complain. Creditor life insurance, like mortgage life insurance, is designed to cover the remaining debt you have. Ultimately, making your mortgage payments on time is reducing your remaining balance. The creditor’s life insurance also decreases as your debt decreases. Note that the lender is named as your beneficiary on your policy, therefore, upon death, the remaining balance on your mortgage or credit card is paid to the lender, not your family. In a personal life insurance policy, you choose the beneficiary and, upon death, the full amount of the benefit is paid to the beneficiary of your choice.

Personal life insurance is a great asset for a myriad of reasons. When you buy life insurance, you are buying with peace of mind, but you need to properly assess your situation and make sure you are clear about exactly what it will do for your family.